Here is the Forecast

CFOs face a growing number of demands in their everyday work. Finance departments need to do things more economically, accurately and efficiently. They also need to do it quickly, in an increasingly demanding regulatory environment.

One of the most important aspects of running an effective finance department is accurate cash flow prediction.

Unfortunately, cash flow forecasting is often seen as a vague, difficult and unproductive discipline. And the mere mention of the words 'forecasting' and 'cash flow' is often enough to give CFOs palpitations, as the production of accurate and timely cash flow forecasts is always heavily scrutinised and done under severe pressure.

One chief difficulty with forecasting cash status is that the process has an image problem, so those asked to produce the necessary data for the treasurer may not see it as a worthwhile activity.

Bas Rebel, a consultant at the Dutch firm Zanders & Partners, says: "Finance people think we've been there before, so why should we bother to do our forecasts properly. It is not worth getting it right to the next digit or putting a huge effort in."

FORECASTING CHALLENGES

Recent regulation changes and attempts to harmonise global financial regulations mean that CFOs must stay highly focused on getting things right first time, according to Mike Shelton, UK managing director of Hyperion.

"Sarbanes-Oxley changed things dramatically," he says. "You have to be able to show the entire auditing process now: who changed the data, and how and when was it done. The entire process needs to be automated to provide proof of what your company has been doing with its money."

Burkhard Straub, treasurer at the German group Leica Microsystems, says that information collection and the production of conclusive scenarios is the most laborious procedure.

Straub says: "I find analysing the accounts receivable and payable data, orders in hand and the development of the individual stock level as well as drawing appropriate conclusions about prospective development the most challenging part of the process."

POTENTIAL PROBLEMS

Getting an accurate picture of future liquidity from separate business units is also problematic. "Every part of the company is optimising its part of the flow process, but without considering the effects of its behaviour on other departments. Different departments also use different language to describe their processes," he adds.

Another issue is time pressure. Most finance departments have an acute lack of time and resources, and CFOs often end up doing most of the work.

Dividing up the work between subsidiaries and head office can be problematic.

Power struggles between subsidiaries and head office can occur, with different units claiming to be running things more effectively.

Local resources are often more focused on getting the end balance right rather than providing accurate cash flow forecasts, while there is often confusion over the difference between cash flow statement prediction according to the accountant and a cash flow forecast according to the treasury.

TECHNOLOGICAL FIX

To minimise this confusion, good technology can be used to support decision-making.

Patrick Coleman, managing director of the Danish financial technology company SimCorp, says: "Many of our recent clients are focused on improving cash and liquidity management. They need tools to collect forecast cash from their business units in a controlled environment and to consolidate these forecasts into a single position from which decisions can be made."

Straub maintains that technology is crucial: "You need an integrated technological platform to overcome the main problems on cash forecasting," he says. Straub's company decided to spend money on updating its software to streamline his department's contribution to forecasts.

"The system we chose is easy to use and provides an internet platform, and it was easy to integrate with our existing SAP and Hyperion technology and other platforms at Leica," he adds. Of course, technology is not a panacea, but it can help, as long as technology providers tailor their products to companies' needs.

TREASURY MANAGEMENT SYSTEMS

Despite the well-documented difficulty of forecasting cash positions, most companies are still failing to see that the use of integrated treasury systems is essential to their business processes and compliance.

According to recent research from Greenwich Associates, only 50% of the world's large corporations and 33% of financial institutions have invested in treasury management systems that include cash flow forecasting technology.

Coleman feels that the lack of investment boils down to the board's disengagement with the issue: "Many companies we have met say people in finance departments need high-level support to get the resources they need to provide accurate forecasting."

Coleman adds that, on average, investment is low because companies do not see the catalysing effect of the investment. "Those that do invest will see that it unlocks resources across the organisation and brings communication between finance people up to the next level."

THE RIGHT TOOL

MS Excel still seems the tool of choice for cash flow forecasting, experts say. However, despite the software's flexibility and universality, its use does have some disadvantages: spreadsheets are difficult to maintain and deploy as a collaboration tool.

Shelton says: "The consolidation of multiple spreadsheets is a nightmare, there are often different ways of calculating things, and the fact that it all has to be done manually makes [MS Excel] a laborious forecasting tool."

Also, the hi-tech community has been highlighting the risks involved in using spreadsheets in cash flow forecasting for some time. Irregularities can be caused by many factors. Shelton says: "Data input in spreadsheets can have an inconsistent structure, and manual consolidation is error prone. The integration of operations and treasury forecasts is difficult and analysis of the forecast cumbersome."

There are a few alternative standalone applications that can be deployed over the web, but integration problems persist. ERP applications, for example, offer some integration, but are still far from perfect.

KEEPING FORECASTING ON TRACK

Even the most sophisticated software cannot motivate staff to carry out the complex forecasting task; motivation is a task for finance executives. "Pushing people's competitive streak can work," says Coleman. "You can set up ranking lists and see which part of the company performs best, which is the most accurate and so on."

Rebel says: "CFOs can look at the key performance indicators and incentive schemes and whether they really trigger a focus on cash as a corporate resource."

Straub has experimented with various different carrot-and-stick approaches, some of which were 'not appreciated'. However, he is convinced that general management will eventually come to appreciate the benefits of accurate cash forecasts.

CASH FLOW CONSIDERATIONS

There are a few key pointers every CFO should consider when determining whether cash flow forecasting is on track. "Working capital management must be as mean and lean as possible, and there should be no idle balances flowing around," says Rebel.

He also advises looking out for unexpected events, especially if the cash consequences of these are unknown. Any well-prepared cash flow statement should allow the CFO to inform stakeholders of any surprises well in advance.

Cash flow forecasting does, in the end, provide a way of demonstrating that a business is in control of its operations, while forecast and process discipline are key to improving cash flow and therefore business performance.

It is not easy - although Rebel believes that the implementation of cash flow forecasting is more difficult than the ongoing execution - but it does require determination, focus and a multidisciplinary project management approach.